German funding row over Airbus hits EADS

PARIS – EADS blamed a funding row with Germany for contributing to a 3 billion euro cash outflow so far this year, which put a blot on the Airbus parent's stronger-than-expected quarterly earnings on Thursday and hit its shares.

Finance Director Harald Wilhelm said the European group was in talks with Germany's government over its decision to withhold a development loan for the Airbus A350, which officials say is in protest at the share of jobs on the $15 billion project.

The company's claim came as a Reuters investigation into resurgent political tensions over the world's largest planemaker found that France has an unusually large share of 42 percent of work on the next-generation A350, compared with Germany's one third.

The mismatch, which includes work by top suppliers, has added fuel to industrial discord with France that may have carried weight in Berlin's recent decision to block a merger of Airbus parent EADS and BAE Systems.

German officials have accused EADS of failing to deliver on promises over the "workshare" on the A350, due to enter service in 2014 in competition with Boeing's 787 Dreamliner. Other sources say Airbus maintains the opposite is the case.

EADS and Airbus declined to comment.

In its first trading update since calling off plans to merge with Britain's BAE last month, Franco-German-led EADS said the A350 aircraft programme remained "challenging" even though engineers had resolved a recent wing-drilling problem.

In an effort to placate investors who had attacked the merger plan for diluting strong sales at Airbus, Wilhelm said the bid to create the world's largest defence company had not indicated any doubts about the strength of the commercial cycle.

He said Airbus would, however, struggle to reach its target of selling 30 A380s this year, while sticking to its target of delivering 30 of the double-decker passenger planes.

CASH FLOW TARGET

EADS posted a 67 percent rise in third-quarter operating profit to 537 million euros on sales of 12.324 billion euros, up 15 percent, compared with average analyst forecasts of 454 million operating profit and revenues of 11.853 billion.

EADS maintained its forecast of an increase of at least 10 percent in annual revenues and still expected to deliver a 2012 operating profit of 2.7 billion euros.

But it disappointed some analysts by toning down its annual cash flow forecast to break even at best, rather than a "positive" cash flow forecast embedded in its half-year results.

The company burned through 3.2 billion euros in the first nine months, which sent its shares down more than 4 percent.

The A350 funding shortfall concerns Berlin's share - estimated at 1.2 billion euros - of development loans usually provided by four European countries.

The use of such loans is fiercely contested by the United States in a long-running trade dispute with Europe, but is now a source of tension between Germany and France whose prime minister has urged Berlin to pay up.

"We would have appreciated to receive the cash but I don't want to comment any further on contractual discussions," Wilhelm told reporters on a conference call.

Airbus has begun assembling the first carbon-composite A350 ahead of its maiden flight next year, a phase requiring significant spending on tools and parts.

"Airbus will need all the cash it can get to fund A350," said Agency Partners analyst Nick Cunningham.

Chief Executive Tom Enders said in a statement the group would put "strong emphasis" on cash generation for the rest of the year and that aircraft deliveries would be key.

Besides the German loan row, EADS has seen some of its cash eaten up by a backlog of A380 superjumbos waiting for delivery following delays caused by wing cracks early this year. The company has also made pre-emptive inventory purchases as a buffer against possible supply chain problems, Wilhelm said.

Europe's largest aerospace company still has a net cash pile on its balance sheet of 8.1 billion euros.